Jeb Bush has released his tax reform plan in an attempt to revive his flagging primary campaign.  There is much for conservatives to like in the Bush tax plan, for it is more radical, economically and politically, than it appears.

On the individual/family side of the tax equation, Bush takes a page from the Reagan 1986 tax reform and flattens the rate structure while increasing standard deductions.  The brackets will be 10%, 25%, and 28%, and the standard deduction will increase by $5,000 for an individual and $10,000 for a married couple.  That latter change alone will drop many from the income tax rolls, and many more who itemize their deductions will no longer need to do so, even for home mortgage interest.  The 3.8% Obamacare tax on investment income and capital gains will be eliminated, and dividends and capital gains will be taxed at 20% (presumably, interest will still be taxed as ordinary income).

Bush also favors low-income filers with tweaks to the EITC – increasing its amount and its phase-out threshold.  This makes the biggest problem of the EITC – its effective marginal tax increase in the phase-out range – arguably worse than it is now, although lower rates and larger standard deductions should cushion that blow a bit.  I suspect that Bush included that provision to insulate him from the inevitable class-war campaign against any Republican tax reform.

Those with high incomes, who do itemize if for no other reason than the need to deduct state income taxes from their federal taxable income, the benefit of the 28% top rate will be reduced by a tough limit on non-charitable itemized deductions, which will be limited to 2% of adjusted gross income (AGI).  Presumably, this means that high income filers can still deduct retirement, HSA, and for self-employed filers, 100% of health insurance and 50% of FICA payments, but mortgage interest, property taxes, state income taxes, casualty losses, and other “below the line” itemized deductions will be capped at 2% of AGI.  Given that the standard deduction for a couple would approach $22,500 under the Bush plan, AGI would have to exceed $1.1 million before itemizing made sense, unless the filer gives a lot of money to charity.  Bush himself forecasts that itemizing filers will drop from 47 million to 13 million, almost 75%.  Presumably, the individual exemptions (which are given regardless of whether one itemizes or takes the standard deduction) of around $4000 per household member, and the clawback of those exemptions starting at around $160K of AGI, would remain – which effectively increases the marginal tax rates for those filers by a modest amount.

From a political standpoint, the Bush plan is aggressive, in that it gives a serious advantage to states with no or low income and property taxes.  Bush explicitly emphasized that point in the fact sheet on his website (linked above).  Even though the overall state/federal rate for filers in high tax states would decrease under the Bush plan, the lack of state-tax deductibility under the Bush plan increases pressure on high-tax states to control their spending and taxing.

It is on the business and investment side that the Bush plan is at its most economically and politically radical.  The corporate tax rate drops to 20% from its current 35%; business investment gets expensed immediately; the system shifts to territorial jurisdiction, with a one-time 8.75% tax on foreign accumulated profits (note, this seems to be assessed regardless of repatriation – a tough $175 billion pill to swallow on $2 trillion in overseas profits, but worth it to clear the decks of this nettlesome issue). 

The Bush plan also does away with the hedge-fund crowd’s carried interest loophole.  Currently, hedge fund managers who are paid for their investing advice with a chunk of the fund’s profits treat that chunk as capital gains income instead of the ordinary income that it is under any common-sense reading of the tax code’s long-standing definition of income.  Ironically, that loophole is not a result of legislation, but of an IRS interpretation of what income is.  Bush would legislatively restore common sense to the tax code on this issue.  You want the lower capital gains rate?  Fine, invest your own money up front, and bear the risk of loss.

Perhaps the biggest corporate tax change is that paired with the immediate expensing of business investments, is an elimination of corporate interest deductions.  This is a huge reform.  Given the level of indebtedness of American businesses, it may require some transition measures.  The effect of making business interest nondeductible goes beyond restoring parity to debt and equity financing.  Currently, large American corporations have borrowed trillions to buy back shares.  It works out great for the top executives, because propping up the per-share price triggers massive bonuses, and the interest, in addition to being very low, is also deductible from the 35% corporate profit tax.  Under the Bush plan, that interest would no longer be deductible, and neither would the price of the shares repurchased, since shares of the company are not the type of productive investment for which Bush would allow immediate expensing.  Going forward, expect leveraged share repurchases, and all the fee income that Wall Street extracts from them, to disappear.  The Hillary-loving Hamptons swells will be very disappointed.

Overall, however, the Bush corporate tax reforms will turbocharge investment and growth – both overall growth, and wage growth.  It will also chip away aggressively at the Democrats’ empire of debt, and build a Republican empire of equity, because when businesses and their owners (which includes all of us, through our pension and savings plans) have equity, they protect it by voting for conservative Republicans, not liberal Democrats.  Over the long term, the political realignment around more equity and less debt may be the most impactful aspect of Bush’s tax reform plan.

David Herr is an attorney and real estate broker in the San Francisco Bay Area.